The Indian retail brokerage industry consists of companies that act as agents for buying and selling securities like stocks and shares on a commission basis, and has grown significantly in recent years. Brokers facilitate transactions between investors on stock exchanges. The top brokers in India still control around 15-16% of the market share, while retail trading contributes around 60% of overall market trading volume.

1. SUMMER TRAINING REPORT
On
Risk Management through Derivatives
At
Prabhudas Lilladher Pvt. Ltd.
Submitted in partial fulfillment of the requirements of the two year
Post Graduate Programme (PGP).
Submitted by
Manisha Gupta
……………………………………………………………………………….
Roll No: PG20095670
Batch: 2009-2011
IILM Institute for Higher Education
1

2. DECLARATION FORM
I hereby declare that the Project work entitled, RISK MANAGEMENT THROUGH
DERIVATIVES submitted by me for the partial fulfilment of the Post Graduate Program (PGP)
to IILM Institute for Higher Education, is my own original work and has not been submitted
earlier either to IILM or to any other Institution for the fulfilment of the requirement for any
course of study. I also declare that no chapter of this manuscript in whole or in part is lifted and
incorporated in this report from any earlier / other work done by me or others.
Place : Delhi
Date :
Signature of Student –
Name of Student: Manisha Gupta
Address: _____________________________
_____________________________
Acknowledgement
2

3. I would like to thank my Mentor Mr. Shiv mishra and my Project Guide Mr. Sandeep Sharma
and Mr. Satyendra Singh who have been the greatest support in completing this project. Without
their constant feedback, this project would not have been a reality.
This project would not have seen the light of the day without the support of our faculty mentor
Mrs. Rakhi Singh. She has been of great help in guiding us through the various stages of our
project.
Constructive criticism and feedback would be highly appreciated.
Manisha Gupta
PG20095670
IILM Gurgaon
Executive Summary/Preface
3

4. A stock broker or stockbroker is a regulated professional broker who buys and sells shares and
other securities through market makers or Agency Only Firms on behalf of investors. A
transaction on a stock exchange must be made between two members of the exchange — an
ordinary person may not walk into the Stock Exchange and ask to trade stock. Such an exchange
must be done through a broker.
Though the Indian brokerage industry has been consolidating steadily over the last 10 years, the
share of the top 10 brokers has risen to only around one-fourth of the total industry revenues. In
this fragmented market, leading players like Religare Securities, ICICI Direct, Kotak Securities,
Indiabulls and Sharekhan, apart from many small players, compete on the basis of low brokerage
fees and customer service.
MajorGainz (Online trading division of Prabhudas Lilladher) is one of those small players
which do not have its public share offering in Indian Capital market till now. Despite being an
out and out private ownership company, Prabhudas Lilladher broking arm has many loyal and
satisfied customers in Western India including states such as Gujarat and Maharashtra. In order
to expend its business and awareness about this one of the oldest broker houses of country
,Company recently came to North India, opening branch offices in New Delhi and Noida. As per
other competitors in north Indian market, Prabhudas Lilladher Pvt. Ltd has aim to position itself
as a niche marketer in Electronic or Online Trading.
Among some achievements of the company, it was the first Broking Company to computerize in
1982 and first brokerage firm to corporatize in 1989. It was rated as 8 th best Indian broking house
and 3rd in generating small cap ideas by Asia Money in 2007.
This topic deals with study of risk management approach on the basis of few selected technology
picks. The topic is vast since it includes the various modern technologies used now a days by
different kinds of brokerage firms so instead of studying the whole lot I have selected the few
techniques picks.
Table of Contents
4

5. Topic……………..……………………..……………………………………………………………Page No.
Acknowledgement……………………………………………………………………….......3
Executive Summery……………………………………………………………………….....4
Industry Study……………………………………………………………………………. 6-9
• Introduction to Stock Market…………………………………………………......10-15
Organization study………………………………………………………………………..16-26
• Company Profile......................................................................................................16-19
• Product & Services..................................................................................................20-24
Competitors Analysis...........................................................................................................27-33
Introduction to Derivatives & Risk Management…………………………………………34-52
• Derivatives………………………………………………………………………....35-36
• Risk Management……………………………………………………………….....37-44
• Risk Management Strategies……………………………………………………....55-51
Cases…………………………………………………………………………………...........52
Statement of Problem………………………………………………………………………..53
Objectives…………………………………………………………………………………....53
Research Methodology………………………………………………………………………54
Analysis of Questionnaire………………………………………………………………….55-65
Findings…………………………………………………………………………………........66
Limitations of the Study……………………………………………………………………...67
Conclusion……………………………………………………………………………………68
Recommendations……………………………………………………………………………69
Industry Relevance…………………………………………………………………………...70
Learning………………………………………………………………………………………71
Appendix (Questionnaire)…………………………………………....……………………..72-75
References………………………………………………………………………………….....76
5

6. INDUSTRY STUDY
The Indian retail brokerage industry consists of
companies that primarily act as agents for the
buying and selling of securities (e.g. stocks,
shares, and similar financial instruments) on a
commission or transaction fee basis.
The Indian retail brokerage market is showing
phenomenal growth. The total trading volume of
brokerage companies has increased from
US$1239.1 billion in 2004 to US$1492.1 billion in
2005, and is expected to reach
US$6535.7 billion by 2015.
The Indian broking industry is reasonably
large and fragmented with 9,000 odd brokers in
the cash segment and around 24,000 sub-brokers. The market share of the top ten brokers in
India has remained largely stagnant in the past four years. The top five brokers in India still
control around 15-16% of the market share. Historically, retail trading contributed around 60%
of the market and FII’s averaged around 20%.
Key developments in this industry included conspicuous expansion in distribution pan India with
greater diversity offered in financial product offerings and an increased emphasis on proprietary
research output. There was a greater than before interest towards engendering a global footprint.
The average daily turnover at the exchanges has increased from Rs851crore in 1997-98 to Rs
1284crore in 1998-99 and further to Rs 2273crore in 1999-2000. NSE has around 1500 shares
listed with the total market capitalization of around Rs9, 21,500crore. Increasing appetite for
equities among investors, the convenience of online trading and declining brokerage fees are the
major growth drivers of the Indian retail brokerage industry.
Financial services:
Financial services refer to services provided by the finance industry. The finance industry
encompasses a broad range of organizations that deal with the management of money. Among
these organizations are banks, credit card companies, insurance companies, consumer finance
companies, stock brokerages, investment funds and some government sponsored enterprises.
A stock broker is a regulated professional broker who buys and sells shares and other securities
through market makers or Agency Only Firms on behalf of investors. A transaction on a stock
6

7. exchange must be made between two members of the exchange — an ordinary person may not
walk into the Stock Exchange and ask to trade stock. Such an exchange must be done through a
broker.
A stock market or equity market is a public market (a loose network of economic transactions
not a physical facility or discrete entity) for the trading of company stock and derivatives at an
agreed price; these are securities listed on a stock exchange as well as those only traded
privately.
The size of the world stock market was estimated at about $36.6 trillion US at the beginning of
October 2008. The total world derivatives market has been estimated at about $791 trillion face
or nominal value, 11 times the size of the entire world economy. The value of the derivatives
market, because it is stated in terms of notional values, cannot be directly compared to a stock or
a fixed income security, which traditionally refers to an actual value.
Participants in the stock market range from small individual stock investors to large hedge fund
traders, who can be based anywhere. Their orders usually end up with a professional at a stock
exchange, who executes the order.
Function and purpose:
The stock market is one of the most important sources for companies to raise money. This allows
businesses to be publicly traded, or raise additional capital for expansion by selling shares of
ownership of the company in a public market. The liquidity that an exchange provides affords
investors the ability to quickly and easily sell securities. This is an attractive feature of investing
in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the dynamics
of economic activity, and can influence or be an indicator of social mood. An economy where
the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock
market is often considered the primary indicator of a country's economic strength and
development. Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and their
consumption. Therefore, central banks tend to keep an eye on the control and behavior of the
stock market and, in general, on the smooth operation of financial system functions.
Relation of the stock market to the modern financial system:
7

8. Statistics show that in recent decades shares have made up an increasingly large proportion of
households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and
other very liquid assets with little risk made up almost 60 percent of households' financial
wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in
financial portfolios has gone directly to shares but a good deal now takes the form of various
kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds,
hedge funds, insurance investment of premiums, etc.
The trend towards forms of saving with a higher risk has been accentuated by new rules for most
funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to
be found in other industrialized countries. In all developed economic systems, such as the
European Union, the United States, Japan and other developed nations, the trend has been the
same: saving has moved away from traditional (government insured) bank deposits to more risky
securities of one sort or another.
Stock market Index:
The movements of the prices in a market or section of a market are captured in price indices
called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euro next
indices. Such indices are usually market capitalization weighted, with the weights reflecting the
contribution of the stock to the index. The constituents of the index are reviewed frequently to
include/exclude stocks in order to reflect the changing business environment.
In India the index used for capturing the price movement of market is S&P CNX Nifty. Standard
& Poor's (S&P) is a division of McGraw-Hill that publishes financial research and analysis on
stocks and bonds. It is well known for the stock market indexes, the US-based S&P 500, the
Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX
Nifty.
Market trend:
A market trend is a putative tendency of a financial market to move in a particular direction over
time. These trends are classified as secular trends for long time frames, primary trends for
medium time frames, and secondary trends lasting short times. Traders identify market trends
using technical analysis, a framework which characterizes market trends as a predictable price
response of the market at levels of price support and price resistance, varying over time. The
terms bull market and bear market describe upward and downward market trends, respectively,
and can be used to describe either the market as a whole or specific sectors and securities
Bull market:
8

9. A bull market is associated with increasing investor confidence, and increased investing in
anticipation of future price increases (capital gains). A bullish trend in the stock market often
begins before the general economy shows clear signs of recovery. It is a win-win situation for the
investors.
Examples
India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for almost five
years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points.
Another notable bull market was in the 1990s and most of the 1980s when the U.S. and many
other stock markets rose; this time period included the dot-com bubble.
Bear market:
A bear market is a general decline in the stock market over a period of time. It is a transition
from high investor optimism to widespread investor fear and pessimism.
"While there’s no agreed-upon definition of a bear market, one generally accepted measure is a
price decline of 20% or more over at least a two-month period."
Examples
A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of the
Dow Jones Industrial Average's market capitalization by July 1932, marking the start of the
Great Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to
1942 occurred in which the market was again cut in half. Another long-term bear market
occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high
unemployment of the early 1980s. Yet another bear market occurred between March 2000 and
October 2002. The most recent example occurred between October 2007 and March 2009.
STOCK EXCHANGE
9

10. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual
organization specialized in the business of bringing buyers and sellers of the organizations to a
listing of stocks and securities together.
Stock Exchanges are an organized marketplace where members of the organization gather to
trade company stocks and other securities. The members may act either as agents for their
customers, or as principals for their own accounts. Stock exchanges also facilitate for the issue
and redemption of securities and other financial instruments including the payment of income
and dividends. The record keeping is central but trade is linked to such physical place because
modern markets are computerized. The trade on an exchange is only by members and stock
broker do have a seat on the exchange.
The stock market in the United States is NYSE while in Canada; it is the Toronto Stock
Exchange. Major European examples of stock exchanges include the London Stock
Exchange, Paris Bourse, and the Deutsche Börse. Asian examples include the Tokyo Stock
Exchange, the Hong Kong Stock Exchange, the Bombay Stock Exchange and the Karachi Stock
Exchange.
Indian stock exchanges:
There are basically three exchanges under the Indian stock exchange -
1. Bombay stock exchange -
A very common name for all traders in the stock market, BSE, stands for Bombay Stock
Exchange. The oldest market not only in the country, but also in Asia.The BSE SENSEX
(SENSitive indEX), also called the "BSE 30", is a widely used market index in India and Asia. In
the early days, BSE was known as "The Native Share & Stock Brokers Association." It was
established in the year 1875 and became the first stock exchange in the country to be recognized
by the government.
In the past and even now, it plays a pivotal role in the development of the country's capital
market. This is recognized worldwide and its index, SENSEX, is also tracked worldwide. BSE
provides an efficient market, upholding the interests of the investors. The market capitalization
as on December 31, 2007 stood at USD 1.79 trillion. An investor can choose from 6000 listed
companies, which for easy reference, are classified into A, B, S, T and Z groups. The Bombay
Stock Exchange is the largest of 22 exchanges in India. It is also the fifth largest exchange in the
world, with market capitalization of $466 billion.
BSE Facts -
• First in India to introduce Equity Derivatives
10

11. • First in India to launch a Free Float Index
• First in India to launch US$ version of BSE Sensex
• First in India to launch Exchange Enabled Internet Trading Platform
• First in India to obtain ISO certification for Surveillance, Clearing & Settlement
• 'BSE On-Line Trading System (BOLT) has been awarded the globally recognised the
Information Security Management System standard BS7799-2:2002.
• First to have an exclusive facility for financial training
Hours of operation -
Session Timing
Beginning of the Day Session 8:00 - 9:00
Trading Session 9:00 - 15:30
Position Transfer Session 15:30 - 15:50
Closing Session 15:50 - 16:05
Option Exercise Session 16:05 - 16:35
Margin Session 16:35 - 16:50
Query Session 16:50 - 17:35
End of Day Session 17:30
BSE Indices -
Till the decade of eighties, there was no measure or scale that could precisely measure the
various ups and downs in the Indian stock market. BSE, in 1986, came out with a Stock Index-
SENSEX- that subsequently became the barometer of the Indian stock market.
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE
National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock
exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras.
11

12. The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since then, it
is being calculated taking into consideration only the prices of stocks listed at BSE. BSE
launched the dollar-linked version of BSE-100 index on May 22, 2006.
With a view to provide a better representation of the increasing number of listed companies,
larger market capitalization and the new industry sectors, BSE launched on 27th May, 1994 two
new index series viz., the 'BSE-200' and the 'DOLLEX-200'. Since then, BSE has come a long
way in attuning itself to the varied needs of investors and market participants. In order to fulfill
the need for still broader, segment-specific and sector-specific indices, BSE has continuously
been increasing the range of its indices. BSE-500 Index and 5 sectoral indices were launched in
1999. In 2001, BSE launched BSE-PSU Index, DOLLEX-30 and the country's first free-float
based index - the BSE TECK Index
BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and
the Dividend Yield Percentage on day-to-day basis of all its major indices.
The values of all BSE indices are updated on real time basis during market hours and displayed
through the BOLT system, BSE website and news wire agencies.
Members -
Transactions in any stock Exchange are executed by member brokers who deal with investor. A
member of a stock exchange is an individual or a corporate body who holds the right to trade in
the stocks listed on the exchange. An investor can buy or sell securities only through one of the
members of the exchange. The Exchange at present has 852 trading members to whom the
clearing number is allotted by the Exchange. Out of these there are 168 individual trading
members and 684 are corporate trading members.
Types of Brokers - There are five types of brokers of BSE.
a) Foreign brokers
b) Industrial groups
c) Local bodies
d) Subsidiaries of Indian financial institutions and banks:
e) Subsidiaries of Stock exchanges
2. National Stock Exchange -
12

13. The National Stock Exchange of India Limited has genesis in the report of the High Powered
Study Group on Establishment of New Stock Exchanges. It recommended promotion of a
National Stock Exchange by financial institutions (FIs) to provide access to investors from all
across the country on an equal footing. Based on the recommendations, NSE was promoted by
leading Financial Institutions at the behest of the Government of India and was incorporated in
November 1992 as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in
April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June
1994. The Capital Market (Equities) segment commenced operations in November 1994 and
operations in Derivatives segment commenced in June 2000.
The following years witnessed rapid development of Indian capital market with introduction of
internet trading, Exchange traded funds (ETF), stock derivatives and the first volatility index -
IndiaVIX in April 2008, by NSE.
August 2008 saw introduction of Currency derivatives in India with the launch of Currency
Futures in USD INR by NSE. Interest Rate Futures was introduced for the first time in India by
NSE on 31st August 2009, exactly after one year of the launch of Currency Futures.
With this, now both the retail and institutional investors can participate in equities, equity
derivatives, currency and interest rate derivatives, giving them wide range of products to take
care of their evolving needs.
India Index Services & Products Ltd. (IISL) -
India Index Services & Products Ltd. (IISL) is a joint venture between the National Stock
Exchange of India Ltd. (NSE) and CRISIL Ltd. (formerly the Credit Rating Information Services
of India Limited). IISL has been formed with the objective of providing a variety of indices and
index related services and products for the capital markets.
IISL has a licensing and marketing agreement with Standard and Poor's (S&P), the world's
leading provider of investible equity indices, for co-branding IISL's equity indices
IISL Indices -
13

14. Major Indices:
* CNX Midcap - Introduced from
a) S&P CNX Nifty July 18, 2005
** CNX Midcap 200 - Discontinued
b) CNX Nifty Junior from July 18, 2005
c) CNX 100 Services provided -
d) S&P CNX 500 A transaction on a stock exchange must
be made between two members of the
e) CNX Midcap *
exchange — an ordinary person may
f) Nifty Midcap 50 not walk into the Stock Exchange and
ask to trade stock. Such an exchange
g) S&P CNX Defty must be done through a broker.
Other Indices: There are three types of stock broking
a) CNX IT Index service.
b) CNX Bank Index a) Execution-only, which means that
the broker will only carry out the
c) CNX FMCG Index client's instructions to buy or sell.
d) CNX PSE Index b) Advisory dealing, where the broker
e) CNX MNC Index advises the client on which shares to
buy and sell, but leaves the final
f) CNX Service Sector Index decision to the investor.
g) S&P CNX Industry Indices c) Discretionary dealing, where the
stockbroker ascertains the client's
h) Customized Indices
investment objectives and then makes
i) CNX Energy Index all dealing decisions on the client's
behalf.
j) CNX Pharma Index
k) CNX Infrastructure Index
l) CNX PSU BANK Index
m) CNX Realty Index
n) S&P CNX Nifty Shariah / S&P CNX 500 Shariah
o) S&P ESG India Index
14

15. ORGANIZATION STUDY
Company Profile:
Prabhudas Lilladher Pvt. Ltd. provides equity research and brokerage services for the
institutional and retail clients. The company offers a range of investment products and services,
which include offline and online equity execution systems; trading in derivatives that include
hedging and index arbitrage; online trading; portfolio management services; portfolio advisory
services; and initial public offer services. It also provides depository services, such as account
opening facilities, dematerialization of physical shares, re-materialization, pledging, and
settlements; mutual funds; reports on select companies by research analysts, daily market reports,
and economy overviews.
Established – 1944 (established by Prabhudas Lilladher Seth)
Headquarter – Worli, Mumbai
Vision – “To be a leading financial services house providing maximum value addition by
offering innovative.”
Principles - Strong adherence to ethics, Uncompromising dedication to quality and an attitude of
excellence
• With a team of dedicated experts and a nationwide distribution network of branches,
franchisees and associates, PL provides a comprehensive gamut of financial services in
the Institutional and Retail domain. Our range of services includes Equity & Derivative
Broking, Investment Banking, Corporate Advisory, Wealth Management, PMS, Online
Trading, Loan Against Shares, Mutual Funds, IPO’s and Insurance.
• Drawing on our team’s profound technical expertise and years of extensive practical
experience, we develop customized solutions that are unique to each of our clients, thus
ensuring high levels of customer satisfaction.
15

16. Group Companies -
• PL Advisory Services Private Limited
• PL Private Limited
• PL Capital Markets Private Limited
• PL Fund Advisors Private Limited
• Distribution Company Private Limited
Key People -
Group Directors:
• Dhiren Sheth
• Dilip Bhat
• Arun Sheth
• Mihir Sheth
• Amisha Vora
Group CFO: Rakesh Bharucha
Vice President and Head of Research, Institutional Equities - Apurva Shah
President and Head of Equities - Sanjeev Patni
Achievements –
• Ranked 8th Best Indian Broking House by Asia Money 2007
• Rated 3rd in generating small cap ideas by Asia Money 2007
Associated Banks - ICICI and HDFC Banks
Sub Brokers –
• SRG Investment Consultants
• Mulki Investments & Financial Consultants (Pvt.) Ltd.
• Parekh Shares & Securities
16

17. Divisions -
• Stock broking
 Online
 Offline
• Insurance
Ownership Pattern - Family owned
Number of people -
• India- 1000-1500
• Kirti Nagar(New Delhi)- about 450
Organization Structure – Organization hierarchy is as below –
MD National Regional Heads State
(North Region – Mr.
(Owners/Stakeholder Head Shiv Mishra) Heads
Sales Executive Sales Manager Area
(FOS – Feet on Street) (Per Area Head) Heads (3-4)
Departments – Different departments are –
In Mumbai only
not in other states
17

18. IT Finance HR Marketing Sales Operations
Approach -
They are committed to providing excellent customer service while maintaining the highest levels
of ethical and professional conduct. At PL, integrity, transparency and accountability form the
founding principles, to which we strictly adhere.
They adopt a service-centric approach, providing customized and practical solutions that are
most pertinent for our clients’ businesses. They work in close association with each individual
client to provide outstanding financial insights, while maintaining complete transparency
throughout the process. Their strong research capabilities and in-depth knowledge help
customers gain an edge over others in this highly aggressive and competitive market. Our
approach embodies the best business practices and meets all the relevant regulatory compliances.
Network -
Name of the No. of State Name of the City No. of State
City Branch Branch
offices offices
Ahemdabad 1 Gujrat Mumbai (Head office) 3 Maharashtra
Bharuch 2 Gujrat Nadiad 1 Gujrat
Chennai 1 Tamilnadu Nagpur 1 Maharashtra
Durgapur 1 West bengal New Delhi 3 UT
jaipur 1 Rajisithan Satana 1 Madhya Pradesh
Kannur 1 Kerela Surat 1 Gujrat
Kocchi 1 Kerela Thiruvananthapuram 1 Kerela
Kolkata 1 West bengal Vadodara 1 Gujrat
Vashi 1 Maharashtra
18

19. PRODUCT & SERVICES
PL’s Products:
1. Institutional Broking -
PL is among the top Institutional brokers in India, with full-service capabilities, catering to a
wide clientele comprising leading domestic and international institutional investors including
pension funds, hedge funds, mutual funds, insurance companies and banks. This business
division mainly covers secondary market broking and marketing of equity offerings including
IPOs to domestic and FIIs. The investment philosophy is a combination of top-down and bottom-
up approach. Largely bottom-up in the case of mid caps and top-down in the case of large caps.
Given the largely un-institutional nature of the Indian market there are several gaps in efficient
pricing knowledge, information as well as long-term trends. With our strong research capability
we believe that we are best poised to leverage this position.
The company has a dedicated research team comprising 19 analysts engaged in macroeconomic
studies, industry and company specific equity research, ensuring consistent delivery of high
quality investment ideas. The sales & trading team, comprising top equity professionals,
translates the research findings into actionable advice for clients, based on their specific needs,
seamlessly executing complex trades, across the entire spectrum of trading strategies. Further the
research is ranked in the Top 5 domestic brokers by Asia Money for several years.
2. Retail Broking -
PL offers world-class trading experience in equities, exchange traded funds, option trades and
more with a personal touch. The clients have access to top-quality research, expert dealing
facilities, e-broking, depository services and investment advisory.
Retail broking requires a highly process driven, diligent approach. At PL the clients are provided
with Offline/Online trading facility, Margin Funding Facility is also available, Powerful research
and analytics supported by a pool of highly skilled Research Analysts, A Single window for
viewing all broking & DP back office information through Smart Account, In-house depository
19

20. with limited Power of Attorney facility and Robust Risk Management systems and practices. PL
retail network has a presence in more than 150 locations across India and follows Ethical
Business Practices.
3. Online Trading
At PL the clients are provided with complete financial portal which serves as their personal
investment guide.www.majorgainz.com an online venture promoted by Prabhudas Lilladher
(PL), is supported by PL’s years of collective experience of the capital markets, powerful
Fundamental & Technical research and reliable state of the art technology architecture provides
Online Trading in Equity, Derivatives & Mutual Funds through a web based platform. PL
provides its clients with extensive information on markets and relevant data which enables them
to make quick, sound and informed decisions. The clients also have access to newsletters on a
Daily and Weekly basis, which will keep you abreast with market information.
Apart from the above services PL also provides various tools, like portfolio tracker, sector watch
and my stock list. Besides PL also provide stock & index quotes, online market commentaries,
fundamental & technical details of most companies with varied research reports and much more,
to help you take informed decisions and make the trading process quicker and efficient.
4. Loan Facilities Offered -
To help meet the liquidity requirements of clients, PL offers Margin funding to individuals and
corporate. Also providing finance for investment in primary market issues and mutual funds. The
PL Group possesses expertise in financing short-term loan facility, to buy securities from
secondary markets for short to medium term.
5. Investment Banking -
Investment banking business is dedicated to provide corporates and entrepreneurs, the highest
quality services for transactions related to the Capital Markets. The company offers a full range
of services and transaction expertise covering the management of Initial Public Offerings &
Follow-on Public Offerings, Rights Issues, Qualified Institutional Placements, Buy Backs,
Takeovers, Delisting and Mergers and Acquisitions. PL has a track record of successfully closing
seven transactions in the last 2 years covering IPO’s & FPO & QIP’s involving a transaction
value of over Rs 600 crores besides completing the Buy back for a listed Company.
6. Corporate Advisory -
PL provides Strategic Advisors to a large number of corporate. PL is registered with SEBI as
Category I Merchant Banker and has raised over US Dollar 1.3 Billion thru GDR's, FCCB's,
Private Placement & IPO's. The company provides its clients with a long term perspective and
20

21. provides well researched professional advice, relevant to their business needs including
expansion, divestment, acquisition and restructuring.
7. Wealth Management -
Wealth Management Group takes care of Wealth Management needs of Individuals. Wealth
Management provides Advice on asset allocation and creating customized financial plans
,Advisory Services comprising a mix of asset classes , Dedicated team committed to delivering
our comprehensive investment management capabilities and resources to meet your individual
objectives ,The strength of combined knowledge and experience provides a disciplined approach
to portfolio strategy development and wealth management.PL has Dedicated Wealth
Management branches across 9 cities and Personalized client service.
At PL, depending on the requirement of the clients, this could include recommending and
creating their investment portfolios, advising on pension strategies, retirement planning, taxation,
etc. This holistic approach to wealth management automatically incorporates the services of the
various specialists within the organization to ensure that you can benefit from the best experience
and expertise available.
8. Portfolio Management Services -
Portfolio Management Services will be ideal for those investors who appreciate capitalizing their
investments with the help of professional Portfolio Managers without feeling the burden of
making day-to-day investment decisions. Portfolio Management Service main aim is to provide
consistent returns in the long-term at a moderate level of risk. The key to achieve this is to
identify fundamentally strong stocks with appropriate diversification to meet the stated objective
of each Portfolio scheme.
9. Distribution -
PL is one of India’s leading companies engaged in the activity of advisory and distribution of
financial products like IPOs and Mutual Funds.PL has a team comprising of competent
professionals who would help select the right solution from a range of options available. The
company has Comprehensive research before recommending products / schemes to clients and
Distribution team of 600+ people spread across a Pan India network gives the reach to almost
any corner of India.
Company’s services:
Retail Client -
DP Charges: Prabhudas Lilladher (PL) PL has been constantly taking efforts to improve the
Business and Customer Experience of all clients. In an effort to be above the current market
21

22. practices the company provides the following services which are suitable for even a middle class
person who can start investing with just a very minimal charge.
1. AMC : 500 + NIL TRANSACTION CHARGES (with Easi Regn)
2. AMC : 750 + NIL TRANSACTION CHARGES (without Easi Regn)
3. 600+Lifetime NIL AMC + TRANSACTION CHARGES (with Easi Regn)
Banks in collaboration- The banks with which PL has collaboration are
1. AXIS BANK
2. BANK OF INDIA
3. CITI BANK
4. CORPORATION BANK
5. HDFC BANK
6. H S B C
7. ICICI BANK
8. KARNATAKA BANK
9. IDBI BANK
10. SOUTH INDIAN BANK
11. STATE BANK OF INDIA
Clients can transfer money to PL through Net or Bank Transfer and get FAST Credit*.
Franchisee or Sub-broker ship -
TERMS AND CONDITIONS: PROGRESS PARTNER (Sharing)
• Person with a good track record & reputation in financial services / other business / social
circles with a good client base.
• Minimum 2-3 years of experience in selling financial products as a Main broker / Sub-
broker /Remisier / Mutual Fund Distributor / Insurance Advisor / Financial Planner or an
employee of existing Broker / Sub-broker.
• The PP & his / her employee should be NCFM / BCSM certified for Cash & F&O
segments. The terminal should be compulsorily operated by the certified holder only. In
22

23. cases where the terminals are operated by persons other than the certified holders, the
responsibility for the trades done through the said terminals and penalty, if any levied by
Exchanges / SEBI to be borne by the PP.
• Sub-broker / Authorized Person registration in SEBI / Exchanges through PL is
compulsory. Accrued brokerage to be disbursed to the PP only on receipt of approval
from SEBI or exchanges.
• Product Support: BSE, NSE, NSE F&O,BSE F&O, CDSL, E-Broking, PMS, Mutual
Fund and Insurance.
• Sales Support: One Relationship Manager to be assigned to you for regular Research
advice & Market Updates through Chat-Phone-Emails
• Marketing & Business Development support on a regular basis.
• Centralized Web based Back office. Support: One Customer Service Executive to be
assigned to you for routine queries through Chat-Phone-Emails.
• Initial Glow sign flex material & Initial Visiting Card (200 in number) to be provided by
PL.
• Real-time Charting Software
Commercial Terms -
• PP to keep a minimum deposit of Rs. 3,00,000 /- (Interest free) for Equity & F&O in BSE
& NSE
• Connectivity
1. Lease line / ISDN (Mumbai) OR VSAT (Rest of India)
2. Connectivity charges will be borne by PP VSAT AMC - Rs. 7,000/- p.a.
3. Monthly Recurring Expenses of Rs. 1500/- Monthly Recurring Expenses of for
usage of 3 Odin licenses (extra above Rs. 3,000/- these 3 IDs will be charged Rs.
500/- per ID) Odin licenses will be charged Rs. 500/- per ID
• Software & other Charges
1. Particulars Amount (Rs.) Charges to be borne by
2. VSAT Installation Charges 15,000/- (One time) PL
23

24. 3. Back Office Software AMC 5,000/- Per annum PP
4. Cost of VSAT 70,000/- (One time) PL
5. ODIN license for Equity & F&O 25,000/- (One Time) PL
6. All Bad debts, punching errors of the orders, if any to be borne by PP
7. Stationery Costs to be borne by PP; Contract notes stationery to be printed by PL
8. Fees of the auditor to be borne by the PP
• Revenue Sharing:
Ratio Sharing Pattern Monthly Brokerage Generated
1. 50:50 PL : PP Upto 2 Lacs
2. 45:55 PL : PP From 2 Lacs to 4 Lacs
3. 40:60 PL : PP Above 4 Lacs
Plans Sheet of Prabhudas Lilladher Pvt. Ltd.:
Common Features Turbo 120 Turbo 60 Turbo 30 Turbo 12 Power 6 Power 3 Power 1 Power +
AO Charges (Rs) 300
Demat AMC P.A. (Rs) Free As per the scheme selected
Exe App Charges As per Table 1 in case of Exe Application
24

25. Default App Access Exe based application Web applet based application
Trading Platform
Odin/ RTGSL/ NOW(Only NSE) Odin/ RTGSL/ NOW(Only NSE)
(Cash & Derv.)
Trading Platform
NSE NOW NSE NOW
(Currency Derv.)
Brokerage on Delivery (Rs) 0.10% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35% 0.40%
Cash Intraday & Future
0.005% 0.01% 0.015% 0.02% 0.025% 0.03% 0.035% 0.04%
Trades (Rs)
Min Paise Per Scrip 0.5p 1p 1.5p 2p 2.5p 3p 4p 5p
Options (Rs Per Lot) 20 30 40 50 Higher of 2.5% of the premium or Rs. 75/-
Initial Margin Amount in Rs Optional Optional 5000
Validity Period 12 Months 12 Months 6 Months Lifetime
Free Call N Trade calls 30 Call 20 Calls
Charges for Call N Trade Rs. 5/- from 31st call Rs. 5/- from 21st call
Adjustable Option
Cost of Subscription (Rs)
120,000 60,000 30,000 12,000 6,000 3,000 1,000 NA
Adjustable
# Newsletters & SMS Calls
Till Scheme Period 2 Quarters 1 Quarter 1 Month Table 2
(Free)
25

26. Scheme Extension ( only if
1 Quarter
renewed)
Only if Adjusted amount is
75% 80% 85% 90%
more than
Installment option (ECS) Quarterly Half Yearly
Rs.15000 for every Rs 5 reduction
Reduction in Option
Brokerage per lot
(Min Rs.10 per lot)
Common Features Turbo 120 Turbo 60 Turbo 30 Turbo 12
Early Exit Cost (5% of NA
6,000 3,000 1,500 600
Scheme Value)
Non Adjustable Option
Cost of Subscription (Rs)
30,000 15,000 7,500 3,000
Non Adjustable
# Newsletters & SMS Calls
Till Scheme Period 2 Quarter 1 Quarter
(Free)
Reduction in Option
Rs.4000 for every Rs 5 reduction (Min Rs.10 per lot)
Brokerage per lot
Brokerage Generated
Discount on Scheme (Rounded off to Nearest
Extension(%) = 20 Times of Integer)
Cost
Table 1 - Exe App Charge (Rs)
If Monthly Brokerage Generated (Rs) Monthly
is Less than 100 750
is Less than 1000 500
is Less than 2000 250
Is More than or = 2000 Free
Table 2 - Newsletter & SMS charges (Rs)
26

27. Period Newsletters SMS Combo
MS WG
Monthly 400 300 100 600
Quarterly 1000 750 250 1500
Yearly 3600 2700 900 5400
COMPETITOR ANALYSIS
It includes company profiles of the following companies -
• Indiabulls Financial Services Limited
• India Infoline
• Sharekhan Securities
• Karvy Pvt. Ltd.
• Religare Securities
And finally the Competitor analysis is done on the basis of -
• Product Comparison
• Pricing Comparison
• Service Comparison
The competitive positioning of various firms is also studied on the parameters such as Website:
Ease of use, Pace of transaction execution, Trading Terminal facility, Tie up with banks, Branch
network and Customer service.
Indiabulls
HQ Region Delhi Area, India
Industry Financial Services
Type Public Company
Status Operating
Company
10,000 employees
Size
2007
11,819 million [INR] (102%)
Revenue
Founded 2000
Website http://www.indiabulls.com
27

28. Indiabulls Group is one of India’s top Business houses with businesses spread over Real Estate,
Infrastructure, Financial Services, Securities, Retail, Multiplex and Power sectors. The group
companies are listed on important Indian and Overseas markets. Indiabulls has been conferred
the status of a “Business Superbrand” by The Brand Council, Superbrands India.
India Infoline
The India Infoline group, comprising the holding company, India Infoline Limited and its
wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging
from Equity research, Equities and derivatives trading, Commodities trading, Portfolio
Management Services, Mutual Funds, Life Insurance, Fixed deposits and other small savings
instruments to loan products and Investment banking. India Infoline also owns and manages the
websites www.indiainfoline.com and www.5paisa.com The Company has a network of 976
business locations (branches and sub-brokers) spread across 365 cities and towns. It has more
than 800,000customers.
HQ Region Mumbai Area, India
Industry Financial Services
Type Public Company
Status Operating
Company
Size 15,000 employees
Founded 1995
Website http://www.indiainfoline.com
Sharekhan
Sharekhan Limited offers online security broking and portfolio services to institutions and large
corporate houses as well as individual investors. Sharekhan Limited was formerly known as
SSKI Investor Services Private Limited. The company is based in Mumbai, India.
HQ Region Mumbai Area, India
28

29. Industry Financial Services
Type Privately Held
Status Operating
Company
1001-5000 employees
Size
Website http://www.sharekhan.com
Karvy
Karvi is a leading player in the financial services industry in India. Karvy has presence with
leadership position in a wide range of financial services including Broking, Commodities,
Registry Services, Merchant Banking, Realty services etc. The group also has presence in the
BPO services and technology services space. IT’S a professionally managed and highly focused
financial intermediary in the Indian markets.
HQ Region Hyderabad, India
Industry Financial Services
Type Public Company
Status Operating
Company Size 7,000 employees
Founded 1981
Website http://www.karvy.com
Religare
Religare Enterprises Limited (REL) is a global financial services group with a presence across
Asia, Africa, Middle East, Europe and the Americas. In India, REL’s largest market, the group
offers a wide array of products and services ranging from insurance, asset management, broking
and lending solutions to investment banking and wealth management. The group has also
pioneered the concept of investments in alternative asset classes such as arts and films. With
10,000 plus employees across multiple geographies, REL serves over a million clients, including
corporates and institutions, high net worth families and individuals, and retail investors.
29

30. HQ Region Delhi Area, India
Industry Financial Services
Type Public Company
Status Operating
Company
10,000 employees
Size
Founded 2006
Website http://www.religare.in
Competitive Analysis on the basis of product, Charges and Service Offered
In online trading Indiabulls has mainly competition with Religare, ICICI-Direct and Sharekhan.
Prabhudas Lilladher broking has an advantage of being in this industry for more than six
decades. It has launched its website and was among the first players in the online share trading.
All companies have decided to spend its advertisement budget through four media i.e.
Television, Print, Web and Outlets.
30

31. India-
Sharekhan ICICI Direct Religare Indiabulls Karvy
infoline
Account opening 750 750 and
Nil 555 500 452
charges(Rs.) (Refundable) 250
Annual
After one
maintenance 500 Nil 250 Nil 330
year
charges(Rs.)
Brokerage rate
0.05% 0.10% 0.05% 0.05% 0.10% 0.50%
(intraday)
Delivery 0.50% 0.75% 0.20% 0.50% 0.50% 0.25%
Online demat &
Yes Yes Yes Yes Yes No
trading facility
India-
Sharekhan ICICI Direct Religare Indiabulls Karvy
infoline
Relationship
Yes No No No Yes No
manager
Software facility Yes On interest No Yes Yes No
Tips & research
Yes On Interest Yes No Yes No
facility
Online Interface Good Poor Average Average Good Average
Comparison between Advance brokerage charging firms
Religare come up with less brokerage charges but big advance brokerage . Major Ganiz here
stands somewhere between religare and Sharekhan Securities( which charges less advance
brokergae than Religare and much lesser brokerage charges).Here Reilance money provides
option of different upfront brokerage at the same advance brokerage fee, with different trading
limits.Major Gainz advance brokerage schemes come in form of two plan types: Power and
Turbo Range respectively.Plan pricing is mentioned under Pricing ‘P’ of service marketing in
Project later.
Advance
Upfront Trading
Plans Brokerage Validity
brokerage limit
fee
A 750 500 1 year 2 lakhs
B 750 1000 2 months 1 crore
31

32. C 750 2500 6 months 6 crore
D 750 5000 12 months 7 crore
E 750 10000 12 months 20 crore
Fig : Advance brokerage plans at Reliance Money
Fig : Advance brokerage plans at Religare Securites
Certaintly if we compare different Advance brokerage plans than Reliance Money stands out as
unique and chapest advance brokerage plan provider as different upfront brokerage at the same
advance brokerage fee, with different trading limits make it simple and easy to prospects.
On the other hand Sharekhan Securities comes up with different advance brokerge plans which
are designed considering usage rates of customers.Advance brokerage plans by Religare
Securities are least complicated to understand and come in only two account type : Raily
Dhanaka Plus and Raily Dhamaka Grand respectively. These two plans require lesser advance
brokerage and brokerage charges than Sharekhan Securities.
32

33. Advance Brokerage 750 1000 2000 6000 18,000 30,000 60,000 1,00,000 2,00,000
AO Charges (Rs)
Exe App Charges Free
Annual Maintenance
400 Rs. (After one year)
Charges
Non Adjustable Option
Brokerage on
10 Ps 9 Ps 7 Ps 5 Ps 4 Ps 3 Ps 2 Ps 1.5 Ps 1.5 Ps
Intraday (Paise)
Brokerage on
50 Ps 45 Ps 40 Ps 25 Ps 20 Ps 18 Ps 15 Ps 10 Ps 10 Ps
Delivery (Paise)
Validity Period 6 Months 6 Months 1 Year
Conclusion:
After comparing all the services provided by the other companies it can be inferred that Reliance Money
is providing the best services as Brokerage charged is minimum and Account opening charges are also
very less.
Therefore according to the above comparison between the companies it is clear that Reliance money is
one of the main Competitor of PL and comparing with Reliance Money PL Group is providing better
services as its brokerage and other charges are comparable to Reliance Money and along with that the
Client satisfaction in PL is higher as compared to other companies. Transparency, Research and
accountability at PL is commendable. Thus after analysis of the competitors it can be concluded that PL is
the best option for investors.
33

34. INTRODUCTION
(Risk Management through Derivatives)
Derivatives have vital role to play in enhancing shareholder value by ensuring access to the
cheapest source of funds. Active use of derivatives instruments allows the overall business risk
profile to be modified, thereby providing the potential to improve earning quality by offsetting
undesired risk.
Under my project report, I have studied various risk management tools. Because impression is
usually given that losses arose from derivatives are extremely complex and difficult to
understand financial strategies. So after interviewing with different brokers, investors and
dealers, I have tried to give a solution to these complexities.
34

35. The need for derivatives as hedging tool was first felt in the commodities market. Agricultural
F&O helped farmers and Processor hedge against commodity price risk. After the fallout of
Britain Wood Agreement, the financial markets in the world started undergoing radical changes,
which give rise to the risk factor. This situation led to development of derivatives as effective
"Risk Management tools".
Derivative trading in financial market started in 1972 when "Chicago Mercantile Exchange
opened its International Monetary Market Division (IIM). The IMM provided an outlet for
currency speculators and for those looking to reduce their currency risks. Trading took place on
currency. Futures, which were contracts for specified quantities of given currencies, the
exchange rate was fixed at time of contract later on commodity future contracts was introduced
then followed by interest rate futures.
Looking at the liquidity market, derivatives allow corporate and institutional investors to
effectively manage their portfolios of assets and liabilities through instruments like stock index
futures and options. An equity fund e.g. can reduce its exposure to the stock market and at a
relatively low cost without selling of part of its equity assets by using stock index futures or
index options. Therefore the stock index futures first emerged in U.S.A. in 1982.
Derivative:
Derivative is a product whose value is derived from the value of an underlying asset in a
contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
Rationale behind the development of derivatives market is to manage this systematic risk,
liquidity and liquidity in the sense of being able to buy and sell relatively large amounts quickly
without substantial price concessions.
Economic Functions of Derivative Market – The following are the various functions that are
performed by the derivative markets:
• Prices in an organized derivative market reflect the perception of market participants
about the future and lead the prices of underlying to the perceived future level.
• Derivative market helps to transfer risk from those who are exposed to it but may like to
mitigate it to those who have an appetite for risk.
• Derivative market helps increase savings and investment in the long run.
Commencement of Derivative Trading in India - The derivatives segment on NSE
commenced with S&P CNX Nifty Index futures on June 12, 2000. The F&O segment of NSE
provides trading facilities for the following derivative segment:
1. Index Futures
2. Index Options
3. Stock Futures
4. Stock Options
5. Forex Futures (started most recently)
Participants of Derivative Market -
35

36. The following are the three broad categories of participants who trade in derivative market
segment:
Hedgers - Hedgers face risk associated with the price of an asset. They use futures & options
markets to reduce or eliminate this risk.
Speculators - Speculators wish to bet on future movements in the price of an asset. Futures and
options contracts can give them an extra leverage; that is, they can increase both the potential
gains and potential losses in a speculative venture.
If hedgers are the people who wish to avoid price risk, speculators are those who are willing to
take such risk. Speculators are those who do not have any position and simply play with the
others money. They only have a particular view on the market, stock, commodity etc. In short,
speculators put their money at risk in the hope of profiting from an anticipated price change.
Here if speculators view is correct he earns profit. In the event of speculator not being covered,
he will loose the position. They consider various factors such as demand supply, market
positions, open interests, economic fundamentals and other data to take their positions.
Arbitrageurs - Arbitrageurs are in business to take advantage of a discrepancy between prices in
two different markets. If, for example, they see the futures price of an asset getting out of line
with the cash price, they will take offsetting positions in the two markets at the same time to lock
in a guaranteed profit.
Arbitrageurs thrive on market imperfections. Arbitrageur is intelligent and knowledgeable person and
ready to take the risk. He is basically risk averse. He enters into those contracts where he can earn risk
less profits. When markets are imperfect, buying in one market and simultaneously selling in other market
gives risk less profit. Arbitrageurs are always in the look out for such imperfections.
Types of Derivatives – The following are the various types of derivative products. However at
present in India only few of them are exchange traded and popular.
36

37. Function of Derivatives -
1. Risk management - It involves structuring of financial contracts too produce grains or losses
that counter balance the losses or gains arising from movements in financial prices. Thus risks
are reduced and profit is increased of a financial enterprises.
2. Price discovery - this represents the ability to achieve and disseminate price information
without price information investors; consumers an producers cannot make decision. Derivatives
are well suited for providing price information.
3. Transactional efficiency - transitional efficiency is the product of liquidity. Inadequate
liquidity results in high transaction costs. These incases investment and causes accumulation of
capital. Derivatives increases market liquidity, as a result transitional costs are lowered, and the
efficiency in doing business is increased.
Risk and Risk Management:
Risk - Uncertainty of the outcome. Risk can bring unexpected gains. It can also cause unforeseen
losses, even catastrophes. Risks are common and inherent in the financial markets and
commodity markets: asset risk (stocks), interest rate risk, foreign exchange risk, credit risk,
commodity risk and so on.
37

38. Risk Management (Using derivatives and other techniques to alter risk and protect
profitability) –
A risk management system is integral to an efficient clearing and settlement system. NSE
introduced for the first time in India, risk containment measures that were common
internationally but were absent from the Indian securities markets.
Risk containment measures include capital adequacy requirements of members, monitoring of
member performance and track record, stringent margin requirements, position limits based on
capital, online monitoring of member positions and automatic disablement from trading when
limits are breached, etc.
Mathematical modeling and Methods of Option pricing underlying assets –
Many forms of financial derivatives instruments exist in the financial markets. Among them, the
three most fundamental financial derivatives instruments are: forward contracts, futures, and
options. If the underlying assets are stocks, bonds, foreign exchange rates and commodities
etc., then the corresponding risk management instruments are: stock futures (options),
bond futures (options), currency futures (options) and commodity futures (options) etc. In
risk management of the underlying assets using financial derivatives, the basic strategy is
hedging, i.e., the trader holds two positions of equal amounts but opposite directions, one in the
underlying markets, and the other in the derivatives markets, simultaneously. This risk
management strategy is based on the following reasoning: it is believed that under normal
circumstances, prices of underlying assets and their derivatives change roughly in the same
direction with basically the same magnitude; hence losses in the underlying assets (derivatives)
markets can be offset by gains in the derivatives (underlying assets) markets; therefore losses can
be prevented or reduced by combining the risks due to the price changes.
Forward contract - An agreement to buy or sell at a specified future time a certain amount of an
underlying asset at a specified price. A forward contract is an agreement to replace a risk with a
certainty. The buyer in the contract is said to hold a long position, and the seller is said to hold a
short position. The specified price in the contract is called the delivery price and the specified
time is called maturity. Forward Contracts are generally traded OTC (over-the-counter).
Let K-delivery price, and T-maturity, then a forward contract's Payoff VT at maturity is -
VT = ST - K, (long position)
VT = K - ST, (short position)
Where ST denotes the price of the underlying asset at maturity t = T.
K- Call option & put option
Illustration: On 1st march 2004 Mukesh has entered into a forward contract with Anil In this
Mukesh takes a long position(buy) on the scrip and Anil takes a short position(short) on the
scrip. Here Mukesh agrees to purchase 100 shares of RELIANCE ENERGY from the Anil for a
predetermined price of Rs.400.The contract is three months forward. Thus on future Anil will
deliver the shares to Mukesh while in return Mukesh will pay the amount of Rs.40, 000
(400*100).
38

39. Specified Price
Mukesh Anil
Specified Asset
Suppose during the maturity date Mukesh may default for the transaction he refuses to make the
payment for the shares or Anil refuse to deliver the shares. Therefore in this there is a counter
party risk one party may default due to this other party suffers because there is no standardized
exchange between the parties and the contract is OTC in nature and also prices are decided by
the buyers and sellers.
Finally forward contract is settled at maturity. The holder of the short position delivers the asset
to the holder of the long position in return for cash at the agreed upon rate. Therefore, a key
determinant of the value of the contract is the market price of the underlying asset. A forward
contract can therefore, assume a positive or negative value depending on the movements of the
price of the asset. For example, if the price of the asset rises sharply after the two parties have
entered into the contract, the party holding the long position stands to benefit, i.e. the value of the
contract is positive for her. Conversely, the value of the contract becomes negative for the party
holding the short position.
Futures - Same as a forward contract, an agreement to buy or sell at a specified future time a
certain amount of an underlying asset at a specified price. Futures have evolved from
standardization of forward contracts. Futures differ from forward contracts in the following
respects -
a. Futures are generally traded on an exchange.
b. A future contract contains standardized articles.
c. The delivery price on a future contract is generally determined on an exchange, and depends
on the market demands.
Illustration: The current market price of INFOSYS COMPANY is Rs.1650. There are two
parties in the contract i.e. Hitesh and Kishore. Hitesh is bullish and Kishore is bearish in the
market. The initial margin is 10%, paid by the both parties. Here the Hitesh has purchased the
one month contract of INFOSYS futures with the price of Rs.1650.The lot size of Infosys is 300
shares.
Suppose the stock rises to 2200 –
Profit
20
39

40. 2200
10
0
1400 1500 1600 1700 1800 1900
-10
-20
Loss
Unlimited profit for the buyer (Hitesh) = Rs.1, 65,000 [(2200-1650*3oo)] and notional profit for
the buyer is 550.
Unlimited loss for the buyer because the buyer is bearish in the market.
Suppose the stock falls to Rs.1400 –
Profit
20
10
0
1400 1500 1600 1700 1800 1900
-10
-20
Loss
Unlimited profit for the seller = Rs.75,000.[(1650-1400*300)] and notional profit for the seller is
250.
Unlimited loss for the seller because the seller is bullish in the market.
Types of futures: On the basis of the underlying asset they derive, the futures are divided into
two types:
1. Index futures - Index futures are the futures, which have the underlying asset as an Index.
The Index futures are also cash settled. The settlement price of the Index futures shall be the
closing value of the underlying index on the expiry date of the contract.
40

41. 2. Stock futures - The stock futures are the futures that have the underlying asset as the
individual securities. The settlement of the stock futures is of cash settlement and the settlement
price of the future is the closing price of the underlying security.
Parties to Futures Contract - There are two parties in a future contract, the Buyer and the
Seller. The buyer of the futures contract is one who is LONG on the futures contract and the
seller of the futures contract is one who is SHORT on the futures contract.
Options - An agreement that the holder can buy from, or sell to, the seller of the option at a
specified future time a certain amount of an underlying asset at a specified price. But the holder
is under no obligation to exercise the contract. The holder of an option has the right, but not the
obligation, to carry out the agreement according to the terms specified in the agreement. In an
options contract, the specified price is called the exercise price or strike price, the specified date
is called the expiration date, and the action to perform the buying or selling of the asset
according to the option contract is called exercise. According to buying or selling an asset,
options have the following types:
1. Call option: is a contract to buy at a specified future time a certain amount of an underlying
asset at a specified price. A call option gives the holder (buyer/ one who is long call), the right to
buy specified quantity of the underlying asset at the strike price on or before expiration date. The
seller (one who is short call) however, has the obligation to sell the underlying asset if the buyer
of the call option decides to exercise his option to buy. To acquire this right the buyer pays a
premium to the writer (seller) of the contract.
Illustration:
Suppose in this option there are two parties one is Mahesh (call buyer) who is bullish in the
market and other is Rakesh (call seller) who is bearish in the market. The current market price of
RELIANCE COMPANY is Rs.600 and premium is Rs.25.
A. CALL BUYER
Here the Mahesh has purchase the call option with a strike price of Rs.600.The option will be
exercised once the price went above 600. The premium paid by the buyer is Rs.25.The buyer will
earn profit once the share price crossed to Rs.625 (strike price + premium). Suppose the stock
has crossed Rs.660 the option will be exercised the buyer will purchase the RELIANCE scrip
from the seller at Rs.600 and sell in the market at Rs.660.
Profit
30
20
41

42. 10
0
590 600 610 620 630 640 650
-10
-20
-30
Loss
Unlimited profit for the buyer = Rs.35 {(spot price – strike price) – premium}
Limited loss for the buyer up to the premium paid.
B. CALL SELLER:
In another scenario, if at the tie of expiry stock price falls below Rs. 600 say suppose the stock
price fall to Rs.550 the buyer will choose not to exercise the option.
Profit
30
20
10
0
590 600 610 620 630 640 650
-10
-20
-30
Loss
Profit for the Seller limited to the premium received = Rs.25
Loss unlimited for the seller if price touches above 600 say 630 then the loss of Rs.30
Finally the stock price goes to Rs.610 the buyer will not exercise the option because he has then
lost the premium of Rs.25.So he will buy the share from the seller at Rs.610.
42

43. Thus from the above example it shows that option contracts are formed so to avoid the unlimited
losses and have limited losses to the certain extent.
Thus call option indicates two positions as follows:
• Long Position - If the investor expects price to rise i.e. bullish in the market he takes a
long position by buying call option.
• Short Position - If the investor expects price to fall i.e. bearish in the market he takes a
short position by selling call option.
2. Put option: is a contract to sell at a specified future time a certain amount of an underlying
asset at a specified price. According to terms on exercise in the contract, options have the
following types:
 European options can be exercised only on the expiration date.
 American options can be exercised on or prior to the expiration date.
A Put option gives the holder (buyer/ one who is long Put), the right to sell specified quantity of
the underlying asset at the strike price on or before an expiry date. The seller of the put option
(one who is short put) however, has the obligation to buy the underlying asset at the strike price
if the buyer decides to exercise his option to sell.
Illustration:
Suppose in this option there are two parties one is Dinesh (put buyer) who is bearish in the
market and other is Amit (put seller) who is bullish in the market. The current market price of
TISCO COMPANY is Rs.800 and premium is Rs.20.
A. PUT BUYER (Dinesh):
Here the Dinesh has purchase the put option with a strike price of Rs.800.The option will be
exercised once the price went below 800. The premium paid by the buyer is Rs.20.The buyer’s
breakeven point is Rs.780 (Strike price – Premium paid). The buyer will earn profit once the
share price crossed below to Rs.780. Suppose the stock has crossed Rs.700 the option will be
exercised the buyer will purchase the RELIANCE scrip from the market at Rs.700 and sell to the
seller at Rs.800.
Profit
20
10
43

44. 0
600 700 800 900 1000 1100
-10
-20
Loss
Unlimited profit for the buyer = Rs.80 {(Strike price – spot price) – premium}
Loss limited for the buyer up to the premium paid = 20.
B. PUT SELLER (Amit):
In another scenario, if at the time of expiry, market price of TISCO is Rs. 900. The buyer of the
Put option will choose not to exercise his option to sell as he can sell in the market at a higher
rate.
Profit
20
10
0
600 700 800 900 1000 1100
-10
-20
Loss
Unlimited loses for the seller if stock price below 780 say 750 then unlimited losses for the seller
because the seller is bullish in the market = 780 - 750 = 30
Limited profit for the seller up to the premium received = 20
Thus Put option also indicates two positions as follows:
• Long Position - If the investor expects price to fall i.e. bearish in the market he takes a
long position by buying Put option.
• Short Position - If the investor expects price to rise i.e. bullish in the market he takes a
short position by selling Put option.
Define S- strike price and T- expiration date, and then an option's payoff (value) VT at expiration
date is -
VT = (ST - K) +, (call option)
VT = (K -ST) +, (put option)
Where ST denotes the price of the underlying asset at the expiration date
K- Call option & put option
44

45. Swaps - Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts. The
two commonly used swaps are:
1. Interest Rate Swaps - These entail swapping only the interest related cash flows between the
Parties in the same currency.
2. Currency Swaps - These entail swapping both principal and interest between the parties, with
the cash flows in one direction being in a different currency than those in the opposite Direction.
Swaption - Swaptions are options to buy or sell a swap that will become operative at the expiry
of the options. Thus a Swaption is an option on a forward swap.
For example, an option to enter into an interest rate swap where a specified fixed rate is
exchanged for floating
 Among all Derivative Products, Futures and Options are highly popular among
investors and generate large turnover.
RISK MANAGEMENT STRATEGIES
Hedging (to invest on both sides to avoid loss) - Most producers and trading companies enter
the derivatives markets to shift or reduce the price risks in the underlying asset markets to secure
anticipated profits.
45

46. You own a stock and you are confident about the prospects of the company. However at the
same time you feel that overall market may not perform as good and therefore price of your
stock may also fall in line with overall marked trend.
You expect that some adverse economic or political event might affect the market sentiments,
though fundamentals of the company will remain good, therefore, it is good to retain the stock.
In both these situations you would like to insure your portfolio against any such market fall.
Such insurance is known as hedging.
Hedging is a tool to reduce the inherent risk in an investment. Various strategies designed to
reduce investment risk using call option, put options, short selling, and futures are used for
hedging. The basic purpose of a hedge is to reduce the risk of loss.
Illustration: A US company will pay 1 million British Pound to a British supplier in 90 days.
Now it faces a currency risk due to the uncertain USD/Pound exchange rates. If the Pound goes
up, it will cost the company more for the payment, thus will hurt the company's profits. Suppose
the exchange rate is currently 1.6 USD/Pound, and the Pound may go up, the company may
consider the following hedging plans -
Plan 1 - Purchase a forward contract to buy 1 million Pound with 1,650,000 Yuan 90 days later
and thus lock the cost of the payment in USD.
Plan 2 - Purchase a call option to buy 1 million Pound with 1,600,000 USD 90 days later. The
company pays a premium of 64, 000 USD (Assuming a 4% fee) for the option.
One can see from this example:
• If the company adopts no hedging plan, its payment will increase if the Pound rate goes
up, and thus will hurt its total profits.
• If the company signs a forward contract to lock the cost of the 90 days later payment, it
has avoided a loss if the Pound goes up, but it has also given up the opportunity of
gaining if the Pound goes down.
• If the company purchases a call option, it can prevent loss if the Pound goes up, and it
can still gain if the Pound goes down, but it must pay a premium for the option.
Reasons to hedge -
• Taxes –
 Treatment of losses
 Capital gains taxation (defer taxation of capital gains)
 Differential taxation across countries (shift income across countries)
• Bankruptcy and distress costs
• Costly external financing
46

47. • Increase debt capacity
 Reducing riskiness of future cash flows may enable the firm to borrow more
money
• Managerial risk aversion
• Nonfinancial risk management
 Incorporates a series of decisions into the business strategy
Reasons not to hedge -
• Transactions costs in derivatives
• Requires derivatives expertise which is costly
• Managerial controls
• Tax and accounting consequences
2. Speculation - An action characterized by willing to risk with one's money by frequently
buying and selling derivatives (futures, options) for the prospect of gaining from the frequent
price changes. A speculator assumes the price risk, hoping to gain risky profits by holding
certain positions (long or short). Speculators are indispensable for the existence of hedging
business, and they came into markets as a necessary result of the growth of the hedging business.
It is speculators who take over the price risks shifted from the hedgers, and thus become the
major bearers of the risks in the derivatives markets. Speculation is an indispensable lubricant in
the derivatives markets. Indeed, frequent speculative transactions make hedging strategies
workable. Comparing to investing in an underlying asset, investments in its options are
characterized by high profits and high risk, since an investment in options markets provides a
much higher level of leverage than an investment in the spot markets. Such an investor invests
only a small amount of money (To pay the premium) but can speculate on assets valued dozens
of times higher than that of the invested money.
Speculation in the Futures Market – Speculation is all about taking position in the futures
market without having the underlying. Speculators operate in the market with motive to make
money. They take:
• Naked positions - Position in any future contract.
• Spread positions - Opposite positions in two future contracts. This is a conservative
speculative strategy.
Speculators bring liquidity to the system, provide insurance to the hedgers and facilitate the price
discovery in the market.
Speculaters
System
Existing New
47

48. Approach Peril & Price Approach Peril & Price
1. Delivery based 1. Both P&L to extent 1. Buy & Sell stocks 1. Maximum loss
& Margin trading, of price change on delivery basis possible to
Forward transactions premium paid
2. Buy Index Future 2. Buy Call & Put by
hold till expiry paying premium
Advantages -
• Greater Leverage as to pay only the premium.
• Greater variety of strike price options at a given time.
Illustration: Here the Speculator believes that stock market will go to appreciate.
Current market price of PATNI COMPUTERS = 1500
Strategy: Buy February PATNI futures contract at 1500
Lot size = 100 shares
Contract value = 1, 50,000 (1500*100)
Margin = 15000 (10% of 150000)
Market action = rise to 1550
Future Gain: Rs. 5000 [(1550-1500)*100]
Market action = fall to 1400
Future loss: Rs.-10000 [(1400-1500)*100]
Thus the Speculator has a view on the market and accepts the risk in anticipating of profiting
from the view. He studies the market and plays the game with the stock market.
Speculating With Options - A speculator has a definite outlook about future price, therefore he
can buy put or call option depending upon his perception about future price. If speculator has a
bullish outlook, he will buy calls or sell (write) put. In case of bearish perception, the speculator
will put r write calls. If speculator’s view is correct he earns profit. In the event of speculator not
being covered, he will loose the position. A Speculator will buy call or put if his price outlook in
a particular direction is very strong but if is either neutral or not so strong. He would prefer
writing call or put to earn premium in the event of price situations.
Illustration - Suppose the price of a certain stock is 66.6 USD on April 30, and the stock may go
up in August. The investor may consider the following investing strategies:
Plan1 - The investor spends 666, 000 USD in cash to buy 10, 000 shares on April 30.
Plan2 - The investor pays a premium of 39,000 USD to purchase a call option to buy 10, 000
shares at the strike price 68.0 USD per share on August 22. Now examine the investor's profits
and returns in two scenarios (ignoring the interests).
48

49. Situation I -The stock goes up to 73.0 USD on August 22.
Strategy A: The investor sells the stocks on August 22 to get 730,000
USD in cash return = 730,000 – 666,000
100% = 9.6%; 666,000
Strategy B: The investor exercises the option to receive a payoff:
Payoff = 730 000 - 680 000 = 50,000 USD
Return = 50 000 - 39 000
39 000 x 100% = 28.2%.
Situation I1 - The stock goes down to 66,O USD on August 22.
Strategy A: The investor suffers a loss:
Loss = 666 000 - 660 000 = 6000USD,
Strategy B: The investor receives a payoff:
Payoff = (660 000 - 680 000) + 2000 = 0.
The investor loses the entire invested 39, 000 USD, hence a loss of 100%.
TYPES -
Position Traders - These traders have a view on the market an hold positions over a period of as
days until their target is met.
Day Traders - Day traders square off the position during the curse of the trading day and book
the profits.
Scalpers - Scalpers in anticipation of making small profits trade a number of times throughout
the day.
3. Arbitrage - Based on observations of the same kind of risky assets, taking advantage of the
price differences between markets, the arbitrageur trades simultaneously at different markets to
gain riskless instant profits. Arbitrage is not the same as speculation: speculation is to seek
profits promised by predictions of the future prices, and is thus risky. Arbitrage is to snatch
profits originated in the reality of the price differences between markets, and is therefore riskless.
Arbitrage is the concept of simultaneous buying of securities in one market where the price is
low and selling in another market where the price is higher. In the futures market one can take
advantages of arbitrage opportunities by buying from lower priced market and selling at the
49

50. higher priced market. JM Morgan introduced EQUITY DERIVATIVES FUND called as
ARBITRAGE FUND where the investor buys the shares in the cash market and sell the shares in
the future market.
Arbitrageur
System
Existing New
Approach Peril & Price Approach Peril & Price
1. Buying stock in one 1.Make money whichever 1. B group more promising 1. Risk free
and selling in another, way the markets move as still in weekly settlement game
exchange.
Forward transactions
2. If future contract more 2. Cash & Carry
Or less than Fair price arbitrage continues
• Fair Price = Cash Price + Cost of Carry.
Illustration –
Current market price of ONGC in BSE= 500
Current market price of ONGC in NSE= 510
Lot size = 100 shares
Thus the Arbitrageur earns the profit of Rs.1000 (10*100)
Strategies:
BUY SPOT, SELL FUTURES - In this the investor observing that futures have been
overpriced, how can the investor cash in this opportunity to earn risk less profits. Say for
instance ACC = 1000 and One month ACC futures = 1025. This shows that futures have been
overpriced and therefore as an Arbitrageur, investor can make risk less profits entering into the
following set of transactions.
• On day one, borrow funds, buy security on the spot market at 1000
• Simultaneously, sell the futures on the security at1025
• Take delivery of the security purchased and hold the security for a month
• On the futures expiration date, the spot and futures converge. Now unwind the position
• Say the security closes at Rs.1015. Sell the security
• Futures position expires with the profit f Rs.10
• The result is a risk less profit of Rs.15 on the spot position and Rs.10 on the futures
position
• Return the Borrow funds.
50

51. Finally if the cost of borrowing funds to buy the security is less than the arbitrage profit possible,
it makes sense for the investor to enter into the arbitrage. This is termed as cash – and- carry
arbitrage.
BUY FUTURES, SELL SPOT - In this the investor observing that futures have been under
priced, how the investor can cash in this opportunity to earn riskless profits. Say for instance
ACC = 1000 and One month ACC futures = 965. This shows that futures have been under priced
and therefore as an Arbitrageur, investor can make risk less profits entering into the following set
of transactions.
• On day one, sell the security on the spot market at 1000
• Mae delivery of the security
• Simultaneously, buy the futures on the security at 965
• On the futures expiration date, the spot and futures converge. Now unwind the position
• Say the security closes at Rs.975. Sell the security
• Futures position expires with the profit f Rs.10
• The result is a risk less profit of Rs.25 the spot position and Rs.10 on the futures position
Finally if the returns get investing in risk less instruments is less than the return from the
arbitrage it makes sense for the investor to enter into the arbitrage. This is termed as reverse cash
– and- carry arbitrage.
Arbitrage with NIFTY Futures - Arbitrage is the opportunity of taking advantage of the price
difference between two markets. An arbitrageur will buy at the cheaper market and sell at the
costlier market. It is possible to arbitrage between NIFTY in the futures market and the cash
market. If the futures price is any of the prices given below other than the equilibrium price then
the strategy to be followed is –
If F > S + C If F < S + C
Buy Spot Buy Futures
Sell Futures Risk Sell Spot
Free
Wait till expiration
Illustration A - Profit Wait till expiration
Spot Price of INFOSEYS = 1650
Future Price of INFOSEYS = 1675
In this case the arbitrageur will buy INFOSEYS in the cash market at Rs.1650 and sell in the
futures at Rs.1675 and finally earn risk free profit Of Rs.25.
Illustration B -
Future Price of ACC = 675
51

52. Spot Price of ACC = 700
In this case the arbitrageur will buy ACC in the Future market at Rs.675 and sell in the Spot at
Rs.700 and finally earn risk free profit Of Rs.25.
Margins - Margins are the deposits, which reduce counter party risk that arise in a futures
contract. These margins are collected in advance at the time of entering into the contract in order
to eliminate the counter party risk. It is this concept of margins which differentiates a Futures
contract from a Forward contract. There are three types of margins in a Futures contract:
Initial Margin - Whenever a futures contract is signed, both buyer and seller are required to
deposit initial margin. Both buyer and seller are required to make security deposits that are
intended to guarantee that they will in fact be able to fulfill their obligation. These deposits are
Initial margins and they are often referred as performance margins. The amount of margin is
varies from 5% to 15% of total contract value of futures contract.
Maintenance Margin - The investor is allowed to withdraw any balance in the margin account
in excess of the initial margin. To ensure that the balance in the margin account never becomes
negative a maintenance margin, which is somewhat lower than the initial margin, is set. After
depositing the initial margin, if the mark to marking loss occurs, it is made sure that the money in
the initial margin account never falls below the maintenance margin.
Variation Margin - If the balance in the margin account falls below or touches the maintenance
margin level, the investor receives a margin call from his broker and he is told to top up the
margin account up to the initial margin level the next day. The top up money deposited is known
as Variation Margin. If the investor does not provide the variation margin, the broker has the
right to close out the open position by selling/buying the contract without even informing the
investor.
Marking to Market - The process of adjusting the amount in an investor’s margin account in
order to reflect the change in the settlement price of futures contract on a daily basis is known as
Marking to Market.
CASES
1. An Indian Garments company has received an order to supply 1, 00,000 units of shirts from
USA. The price of $ 500,000 is receivable after six months. The current exchange rate is
Rs.39.76/$. At the current exchange rate, the company would get: 39.76 × 500,000 = Rs 1, 98,
52

53. 80,000. But the company anticipates appreciation of Indian rupee over time. Does the company
loose/gain due to appreciation in the Indian Rupee? How does company minimize the risk?
Illustration - The Company can lock in the exchange rate by entering into an advance contract
and forget about any fluctuation in the exchange rate. Suppose, the six-month forward exchange
rate is Rs39.00/$. The company can make an agreement at spot rate at 39.76 in the spot market
or at a lesser price. At the time of receiving dollar, it will exchange $500,000 at Rs39.76= Rs 1,
98, 80,000 or agreed price.
2. You have imported machinery for $ 100,000 on 180 days credit at zero interest. The dollar
quotes at Rs 39. Is this deal risk free?
Illustration - This deal is not free of risk because after six months when you pay the loan, if the
dollar quotes anything more than Rs39. say Rs 40, you will end up paying more [Rs 1 extra for
every $ 1, which is equivalent to Rs 100,000 additional cost]. On the other hand, if the dollar
quotes anything less than Rs 39, you will stand to gain.
• The question here is not whether you stand to gain or loose – it is the risk you are taking
3. You have surplus cash for investment. You think of investing in Wipro, currently quoting at
Rs 3,500, which you believe will rise to Rs 3,950 in six months. Is this deal risk free?
Illustration - This deal is not free of risk because there is no guarantee that Wipro’s shares
would touch Rs 3,950 in six months time. The share prices could rise beyond Rs 3,950 or could
also fall below Rs 3,500 – giving you no return on investment and you could stand to loose some
portion of your investment.
STATEMENT OF PROBLEM
Prabhudas Lilladher is recently entered into Delhi market. It is necessary to know how other
brokerage firms managing risk through derivatives in Delhi and what strategies they are
53

54. following to mitigate risk. With a vision of prevailing company for any loss in future due to
derivatives and risk management factor, this research was made.
OBJECTIVES
Primary Objectives –
1. To find out extent to which risk can be reduced by applying different strategies.
2. To find out methods and techniques available in the modern market to evaluate and lay off the risk.
3. To know the awareness & familiarity investors, dealers and brokers hold regarding Risk management
and derivatives market.
Secondary Objectives –
1. Current trends followed by various financial / brokerage firms.
2. To explore the possible opportunities to further mitigate the risk factors.
3. To know the experience of dealers, investors and brokers with derivatives till date.
4. To get knowledge about shortcomings in risk management through derivatives.
5. To know how derivatives are used in covering risk and give a safe exposure.
RESEARCH METHODOLOGY
Assumptions: The research was based on the following assumption:
54

55. • The methodology used for this purpose is survey and questionable method. It is assumed
that this method is more suitable for collection of data.
• It is assumed that the respondent have sufficient knowledge to ensure questionable.
• It is assumed that the respondent have filled right and correct option according to their
view.
Research Design: Different type of research designs is available depending upon the nature of
research project, availability of able manpower and circumstances. The study about “Risk
management through derivatives " is descriptive in nature. So survey method is used for the
study. Descriptive research includes surveys and facts-findings enquiries of different kinds.
Sampling Procedure:
Sample Selection – Specific department (Offline department) of Brokerage firms
Elements-
1. Employees doing offline services of the brokerage firms
2. Number of brokerage firms available in the city which provide these offline services
Sampling Units - Employees of offline department working in the brokerage firms
Sampling Frame - Brokerage firms of Delhi (NCR)
Sampling Technique - The technique used for sampling by us is non-probability sampling
technique; under this we are using convenience sampling.
Sample Size - The survey was circulated to 50 employees (brokers, dealers and investors) of
different firms.
Time Frame – 3rd may 2010 – 3rd June 2010
Sources of Data: The sources of data include primary and secondary data sources.
Primary Sources - Primary data is collected by structured questionnaire administered by sitting
with guide and discussing problems.
Secondary Sources - The secondary data is collected from newspaper, magazine, and internet.
Data collection instruments – For survey respective questionnaire were prepared analyzing
various aspects through which a conclusive deduction could be made. The survey was circulated
over to offline department employees working in different organizations.
ANALYSIS OF QUESTIONNAIRE
55

56. In today's era, it is very necessary for employees or customers to take decision very carefully
while online or offline work happens. Risk management is one of the most influential way of
offline department. Now employees evaluate the risk and use the various approach of risk
management on the basis of various attributes. Risk management and other online or offline
services create an image in the mind of customers and employees which helps in building
brokerage firm’s reputation in the Indian economy. So these services can be an effective tool to
attract customers.
The above observation is made on 50 employees of different brokerage firm in Delhi. I have
done an analysis of the questionnaire filled by them and try to draw conclusion .On the basis of
analysis of employees the following conclusion has been drawn from the study -
1. Trading Period in Derivatives –
From my sample of 50, 32% brokers and investors investing in derivatives from last 1 year and
20% less than one year. 26% are investing from last 2 years, 12% are investing from last 3 years
and only 10% have experience of more than 3 years of investment in derivatives.
2. Purpose for Derivatives Trading –
56

57. Reasons behind adoption of derivatives are different by brokers, investors and dealers e.g.,
hedging, investor demand (speculation) etc. Out of 50 brokers, investors dealing in derivatives
36% adopt it due to characteristics of hedging, 20% due to , 32% for investor (client's) demand
(speculation) and remaining 12% due to others reason.
3- Experience with Derivatives –
Out of my sample size 50, only 38% find derivatives as quite profitable investment. 22% find
that derivatives can’t give big profits in future. 30% feels that equities are better option for
investment than derivatives. Remaining 10% have other opinion that only those investors,
brokers can derive good return from derivatives those have surplus funds and patience for long
period because derivative requires huge investment and risk also.
4. Relationship with Cash Market -
57

58. Out of 50 brokers, dealers 48% have the positive response toward the relation between derivative
and cash market and remaining 8% has negative response. 44% are not able to say anything
because they don’t have proper knowledge about stock market. They are investing with the
guidance of brokers and with the support of their close relatives those are investing for last many
years.
5. Broker's Perception towards Indian Investors -
Out of total 50, 62% of investors and dealers are saying it hasn't settled in Indian investor
psyche and 38% are saying it has.
6. Shortcomings in Indian Derivative System –
58

59. Out of total 50, 44% brokers, investors respond towards shortage of domestic technical expertise.
52% feel lack of awareness in investor about derivatives and remaining 4% market failure.
7. Media preferred for investor education-
Out of total 50, 32% brokers and investor said they would prefer TV most for investor education,
48% said newspaper, 14% said magazines while 6% said other mediums like internet etc.
8. Impact on Customer Base -
59

60. Out of 50 brokers and investors, 6% of brokers said that it doesn't increase their customer base
because introducing small savings as investment, but derivatives increases customer base of 70%
which is more than half. It is basically beneficial for those who are investing from last 2 or more
years. In investment sector need minimum of Rs. 2,00,000 as investment so it is basically for
corporate and investment sector only not for small investors. 24% said their customer base
remain same because they have started just now for investing in derivatives, in future it will
increase their customer base.
9. Suggestions to make with regard to investor education in derivatives market in India –
Most of the respondent said there should more education media for derivative trading and there
should be new software for accurate update.
10. Importance of Different Factor in Decision not to Use Derivatives – Given that firms not
using derivatives are as prevalent as firms using derivatives. I once again asked firms that did not
60

61. use derivative to provide some information on why they choose not to use them to do this; I
asked the non users of derivatives to rank the three primary factors in their decision not to use
derivatives. The responses to this question are shown in above figure-
The figure reveals that the majority of firms (60%) don’t use derivatives because their responses
are too small. An additional14% of non users with potentially large exposures indicated that the
most important reason they don’t use derivatives is that they can manage their exposures
effectively by other means such as operational diversification on risk shifting/sharing arranged,
Another group of nonusers indicated that they did not perceive the benefits of derivative use to
exceed the costs, making their use a poor business decision. This was the most important reason
for not using derivatives for 12% of non users but a secondary reason for nearly an additional
40% of non users.
The only other concern receiving much weight was the concern about perceptions of derivatives
use by others such as investors/analysts. 10% of the firms indicated that this was the primary
reason in their mind for not using derivatives with an additional 31% citing it as a supporting
explanation.
The other 3 specifically mentioned issues, difficulty pricing & valuing derivatives concerns over
disclosure requirements of SEC & concerns over the new FASB accounting treatment issues all
generated only taken measures of concerns from the respondents. Among the other issues that
more than one firm mentioned for not using derivatives were corporate prohibition on their use.
61

62. 11. Firm Transact to Currency Derivative Market –
S.N. NA Never Sometimes Frequently
1 Hedge foreign repatriation(dividends, 82% 12% - -
royalties, interest payments)
2 Hedge contractual commitments 72% 16% - -
A On-balance sheet transaction(account 50% 26% 10% 1%
receivables/payables)
B Off-balance sheet transaction(Unfilled or 54% 26% 8% 2%
pending contract)
3 Hedge anticipated transactions one year 50% 24% 12% -
or less
4 Hedge anticipated transactions over one 48% 24% 10% 1%
year
5 Hedge transaction of foreign accounting 44% 26% 8% -
statements
6 Hedge economic/competitive exposure 46% 28% 12% 1%
7 Arbitrage borrowing rates across 60% 18% 2% -
currencies(currencies swaps in
association with foreign currency
borrowings)
The table reveals that there is not much information about transaction to currency derivative
market.
62

63. 12- Average percentage of exposure hedged –
Not much known about the extent to which firm’s hedge their various exposures, so in this
survey we asked firms to indicate the percentage of the perceived exposures that they typically
hedge across various categories of currency exposure. The responses were aggregate into four
classes, firms that hedge 0-25%%, 25-50%, 50-75%, 75%-100% of that particular exposure.
Table displays the percentage of firms responded in each of the four groups for each of seven
different categories of exposure.
25%-50 50%-7 75%-1 Average %
% 5% 00% of exposure
S.N. % of exposure typically hedged <25%
Hedged
1 On-balance sheet transactions 40% 13% 12% 35% 49%
2 Off-balance sheet transactions 72% 11% 5% 13% 23%
3 Anticipated transactions one year 78% 22% 9% 27% 42%
or less
4 Anticipated transactions over one 98% 11% 4% 6% 16%
year
5 Economic/competitive exposure 84% 6% 2% 3% 7%
6 Foreign repatriations 50% 14% 5% 31% 40%
7 Transaction of foreign accounts 84% 6% 3% 8% 12%
The table reveals that with the exception of 3 types of exposure, even for three heavily hedged
exposures, the average proportion hedged shown in the final column of the table is less than
50%. Thus partial hedging appears to be normal practice for these firms. Even in the case of
three type exposures, only a third of firms indicate that they hedged more than 75% of total
exposure. Again, these three were more identifiable near term, transaction based exposure. For
longer term exposure such as anticipated transact beyond one year and economic/competitive
exposure, less than 10% of firms indicated that they hedged as much as 75% of the perceived
exposure. These results suggest that foreign currency hedging rather than eliminating exposures,
generally only reduces the exposure, but typically by less than half of original outstanding
exposure.
13. Maturity Structure of Hedging –
63

64. S.N. % foreign currency Zero 1%-25% 25%-50% 50%-75% 75%-100%
hedging activity with
maturities of:
1 90 days or less 18% 23% 26% 13% 21%
2 91 -180 days 23% 44% 26% 3% 4%
3 181 days to 1 year 31% 41% 22% 3% 3%
4 1year to 3 year 63% 26% 6% - 5%
5 Beyond 3 year 88% 9% 2% - 2%
We know the most firm use derivatives with short maturities. The percentage of firms using
derivatives at longer maturities decreased significantly with the maturities of derivatives; only
30% of firms reported any use of derivatives ten or greater than 3 yrs. So we asked firms to
provide some information on the maturity structure of their foreign currency hedging.
The above table displays the results of above enquiry asking firms to indicate the percentage of
their foreign currency hedging done with instruments of various original maturities. There are
several interesting things to note about table. First short term derivatives are used by a vast
majority of firms. 82% of firms utilize foreign currency derivates with an original maturity of
91-180 day for less while only12% foreign currency derivatives of more than 3 years. Second,
firms tend to concentrate most of their foreign currency derivatives uses at short horizons
especially 90 days or less. In fact when we combine the responses in the first two rows, nearly
one quarter of the firms do all of their foreign currency derivatives activity in instrument with
original maturity of 180 days or less. Finally the intensity of usage drops of dramatically with the
lengthening of the derivates. Very few firms use any instruments with maturity over one year.
There is a small group, 7% of firms, all large firms which concentrate their foreign currency
derivates usage in the long horizon instruments.
14. Benchmark for Evaluating Foreign currency Risk Management –
64

65. For foreign currency risk management we ask firms about the .benchmark they use for
evaluating foreign currency risk management over the budget planning period.
28% of firms indicating that they did not had a benchmark for evaluating foreign currency risk
management process. Of the remaining responding firms, the most common benchmark was the
use of forward rates available at the beginning of the budget planning period. 24% of the firms
with some benchmarking use the forward rates which is a simple and reasonable approach to the
question. 20% of the firms indicated that they simply use the spot rates available at the beginning
of the period. The approach is questionable on theoretical grounds as the current spot rates do not
incorporate any market expectations of the currency movements over the periods nor do they
offer rates at which risk could actually be laid off. 14% of the firms with some forms of
benchmarks use a baseline percentage hedged strategy. The firms indicated that the baseline for
these benchmarks typically ranged from 50% - 100% hedged. Finally 14% of the firms indicated
the use of some other form of benchmark.
Examples of the these includes comparison against fully open and fully hedged results,
comparison against an average executable rate over a period, comparison against some
combination of a forward and an option hedge and simple profit and loss currency derivates,
while some of these ideas have more merit than others. It is disturbing that nearly half of the
firms do not have well specified benchmarks for evaluating whether their foreign currency risk
management process is providing any useful service to the firm.
15. Monitoring and Evaluation –
65

66. We know that an important issue in the monitoring derivates is to value them and measure their
risk. Such monitoring helps keep the firms abreast of market change as well as provide the basis
for determining such change in value and whether such change in value continue to constitute a
sufficient hedge of the underlying exposure. To this end, I ask firms to indicate how frequently
they value their derivative portfolio. The above figure reports that a significant proportion of the
firms, 19% are evaluating their derivative portfolio daily, while another 27% revalue monthly
and 21 % revalue quarterly. Only 5% are evaluating their derivative portfolio annually
FINDINGS
66

67. 1. About half of nonfinancial firms, brokers and investors are not investing in derivatives.
Brokers not dealing in derivatives at present are also not going to adopt it in near futures.
2. The most important reason brokers and investor don’t use derivatives is that they can manage
their exposures effectively by other means such as operational diversification on risk
shifting/sharing arranged.
3. Hedging is the most important feature of derivatives. It is not for small investors. Through the
study it has found out that, the hedging provides a safe position on an underlying security. The
loss gets shifted to a counter party. Thus the hedging covers the loss and risk. Sometimes, the
market performs against the expectation. This will trigger losses. So the hedger should be a
strategic and positive thinker. It has increased brokers turnovers as well as helpful in aggregate
investment.
4. The study reveals the effectiveness of risk reduction using hedging strategies. It has found out
that risk cannot be avoided. But can only be minimized.
5. Brokers haven't adequate knowledge about options, so most of them are dealing in futures
only.
6. People are not aware of derivatives, even people who have invested in it, hasn’t adequate
knowledge about it. These people are interested to take it in their future portfolio also. They
consider it as a tool of risk management.
7. They are investing in future contract, because futures have up to home extent similar quality as
Badla.
8. If the trader is not sure about the direction of the movement of the profits of the current
position, he can counter position in the future contract and reduces the level of risks.
9. Results suggest that foreign currency hedging rather than eliminating exposures, generally
only reduces the exposure, but typically by less than half of original outstanding exposure.
10. Most of the firms are evaluating their portfolio on monthly basis. That is beneficial for the
firm.
LIMITATIONS OF THE STUDY
67

68. No study is complete in itself, however good it may and every study has some limitations –
Limited time: Due to limitation of time a sample size of only 50 respondents were chosen.
Limited Area: Due to small sample size and limited area the data analysis of all north Indian
states trading account holders can be manipulated.
Unwillingness of respondent: Respondents unwilled to respond to questions which they
consider to be inappropriate for the given context.
Legitimate Purpose: Explaining why the data are needed made the request for the information
seemed legitimate and increased the respondents' willingness to answer.
Sensitive Information: Respondents unwilled to disclose, at least accurately, sensitive
information because this might cause embarrassment or threaten the respondent's prestige or self-
image.
Response error: Respondents might have given wrong answers in hurry. People are reluctant
towards the survey and take it as a waste of time.
Non response: Within sample few people denied to respond and few respondents filled the
incomplete information
Other Limitations:
• Some of the respondents may be biased in giving responses.
• Complete data was not available due to company privacy and secrecy
68

69. CONCLUSION
On the basis of overall study on risk management through derivatives it was found that
derivative products initially emerged as hedging devices against fluctuation and commodity
prices and commodity linked derivatives remained the soul form of such products. The financial
derivatives came in spotlight in 1972 due to growing in stability in financial market.
I was really surprised to see during my study that a layman or a simple investor does not even
know how to hedge and how to reduce risk on his portfolios. All these activities are generally
performed by big individual investors, institutional investors, mutual funds etc.
No doubt that derivative growth towards the progress of economy is positive. But the problems
confronting the derivative market segment are giving it a low customer base. The main problems
that it confronts are unawareness and bit lot sizes etc. these problems could be overcome easily
by revising lot sizes and also there should be seminar and general discussions on derivatives and
risk management at varied places.
Regarding future, I have find out that derivatives can indeed be used safely and successfully
provided a sensible control and management strategy is established and executed. Inspite of that
more awareness should be done and technical expertise knowledge should be more expanded.
The World Financial Markets have undergone qualitative changes in the last 3 decades due to
phenomenal growth of Derivatives. An increasingly; large number of organizations now consider
derivatives to play a significant role in implementing their financial policies. Derivatives are
used for a variety of purposes, but perhaps, the most important is hedging.
Hedging involves transfer of market risk- the possibility of sustaining losses due to unforeseen
unfavorable price changes. A derivatives transaction allows a firm to alter its market risk profile
by transferring to counter party some type of risk for a price. Hedging is prime reason for the
advent of derivatives and continuous to be significant factor driving financial managers to deal in
derivatives. Markets in India have developed a lot day by day these instruments are becoming the
integral part of Investments
69

70. RECOMMONDATIONS
This research study shows that risk management is a vast topic to study and employees learns
day by day to mitigate risk in different ways.
1. Lot Size - Lot size should be reduced so that the major segment of an India society i.e. small
saving class can come under F & O trading. There is strong need for revision of lot sizes as the
lot sizes of some of the individual scrip that were worth of Rs. 200000 in starting, now same lot
size amount to a much larger value.
2. Scrips - More scrips of reputed companies etc. should be introduced in "F & O segment".
3. The hedging tool to reduce the losses that may arise from the market risk. Its primary
objective should be loss minimization, not profit maximization.
4. Training Classes or Seminars - There should be proper classes on derivatives and risk
management for investors, traders, brokers, students and employees of stock exchanges because
lack of knowledge is the main reason of its less development. The first step towards it should be
seminars provide to brokers & LSE employees and secondly seminar to students.
5. New Software – There should be new software for risk management and fast trading.
6. I came to know about most important factor about the product with the help of factor analysis,
so we should go for change the product according to the customer need.
7. Some promotional activities are required for the awareness of the customer, seminars should
be held for providing information to prospective and present customer.
8. The hedger will have to be a strategic thinker and also one who think positively. He should be
able to comprehend market trends and fluctuations. Otherwise, the strategies adopted by him
earn him earn losses.
9. The hedging tool is suitable in the short term period. They can be specifically adopted by the
investor, who are facing high risks and has sufficient liquid cash with them. Long term investor
should beware from the market, because of the volatile nature of the market.
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71. 10. A lot more awareness needed about the stock market and investment pattern, both in spot and
future market. The working of BSE Training Institute and NSE Institutes are apprehensible in
this regard.
INDUSTRY RELEVANCE
My research project is Quite Relevant to the Offline Department of the company, where
employees are mitigating portfolio risk through derivatives. The following things can be useful
for Prabhudas Lilladher Pvt. Ltd. –
1. The Company will be able to know their market position with other competitors in Delhi
(NCR) region.
2. The company will also get to know some areas of improvement which came forward through
my research.
3. The changing perception of Indian consumers, investor and brokers, and their requirements
will also be made clear.
4. The investment companies at large will be able to understand how to keep themselves abreast
with the changing technology.
5. They will get knowledge about different risk management strategies used in equity market.
71

72. LEARNINGS
The two month summer training was a good experience for me to learn the practical aspects of
the corporate life. Some of the learning of mine is:
1. In PL India I have learned how to maintain good relations with the customers by giving them
the proper service and solving their queries regarding the share market.
2. I improved my communication skills by learning how to talk to different kind of people as it
requires the different approach to handle each person.
3. I have also learned how to maintain good relation with the employees and the co- trainees.
4. Learned about various products of the PL India Pvt. Ltd.
5. Learned how to use online trading terminal.
6. Learned few things about back office work.
7. Learned how to approach the customers.
8. Learned how to open and close the calls.
9. Patience was the thing I learnt the most as I have to approach the clients who were to be
explained same things again and again while approaching or calling them at regular Intervals
10. Learned how to interact with people, how to convince them and guide them in trading.
11. Learned the importance of the Excel sheet. I maintained all my daily records in the Excel
sheet.
12. Got the practical knowledge of the market.
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73. 13. Had a practical experience of working in a reputed organization.
14. Got the corporate exposure.
APPENDIX
Questionnaire
Dear Respondent,
I am Manisha Gupta, student of MBA at IILM Institute, Gurgaon & this is the part of the market
research for the PGP program. You are requested to fill this questionnaire to enable me to
undertake the study on the project. Your information will be valuable to me. I ensure your data
will be kept confidential. Hoping for your co-operation.
1- For how long you have been trading in derivatives?
a) Less than 1 year b) 1 Year c) 2 Year
d) 3 Year e) More than 3 years.
2- What is your purpose for trading in derivatives?
a) Hedging b) Speculation c) Arbitraging d) Others
3- How will you describe your experience with derivative till date?
a) I find these quite profitable
b) I don't find derivatives can give big profits
c) I feel that equities are better than derivatives
d) Any other __________________________________
4- What according to you is relationship between derivative market and cash market?
a) Positive b) Negative c) Can't say
5- According to you have derivatives settled in Indian investors psyche?
a) Yes b) No
6- What shortcomings do you feel in Indian derivative market?
a) Lack of awareness among the investors about derivatives.
b) Shortage of domestic technical expertise.
c) If any other___________________________
7- Which of following Media would you prefer the most for investor education?
a) TV b) Newspaper c) Magazines d) Others
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74. 8- Indicate how the derivative usage is in the current year compared to usage in the previous
year.
a) Usage has increased b) Usage has decreased c) Usage has remained constant
9- What suggestions do you want to make with regard to investors education in derivatives
market in India?
___________________________
10- Please indicate the three most important factors in your decision not to use derivatives-
S.N. High Medium Low
1 Insufficient exposure to financial or commodity prices
2 Exposures are more effectively managed by other means
3 Difficulty pricing & valuing derivatives
4 Disclosure requirements of the SEC or FASB
5 Accounting treatment
6 Concerns about perceptions of derivative use by
investors, regulators and the public
7 Cost of establishing & maintaining a derivatives
program exceeds the expected benefits
8 Other
11- How often does your firm transact to the currency derivatives market to-
S.N. NA Never Sometimes Frequently
1 Hedge foreign repatriation(dividends,
royalties, interest payments)
2 Hedge contractual commitments
A On-balance sheet transaction(account
receivables/payables)
B Off-balance sheet transaction(Unfilled or
pending contract)
3 Hedge anticipated transactions one year or
less
4 Hedge anticipated transactions over one
year
5 Hedge transaction of foreign accounting
statements
6 Hedge economic/competitive exposure
74

75. 7 Arbitrage borrowing rates across
currencies(currencies swaps in association
with foreign currency borrowings)
12- What percentage of the following categories of exposures do you typically hedge-
S.N. % of exposure typically hedged <25% 25%-50% 50%-75% 75%-100%
1 On-balance sheet transactions
2 Off-balance sheet transactions
3 Anticipated transactions one year or
less
4 Anticipated transactions over one year
5 Economic/competitive exposure
6 Foreign repatriations
7 Transaction of foreign accounts
13- What percentage of your total foreign currency derivatives(by face value of contracts) have
the following original maturities-
S.N. % foreign currency Zero 1%-25% 25%-50% 50%-75% 75%-100%
hedging activity with
maturities of:
1 90 days or less
2 91 -180 days
3 181 days to 1 year
4 1year to 3 year
5 Beyond 3 year
75

76. 14- Which benchmark does your firm use for evaluating foreign currency risk management over
the budget/planning period?
a) Firm does not use benchmark
b) Forward rates available at the beginning of the period
c) Spot rates at the beginning of the period
d) Baseline percent hedged strategy
e) Other benchmark
15- How frequently do you value your derivatives portfolio?
a) Daily b) Monthly c) Quarterly d) Annually
e) As needed/No set schedule f) Other
THANKS FOR YOUR COOPERATION
Names:
Occupation:
Phone No.:
Branch name:
76

77. REFRENCES
Website -
http://www.plindia.com/ (Accessed on - 2/05/2010)
http://nseindia.com/ (Accessed on - 4/05/2010)
http://bseindia.com/ (Accessed on - 4/05/2010)
http://money.rediff.com/ (Accessed on - 16/05/2010)
http://www.religare.in/ (Accessed on - 20/05/2010)
http://www.sharekhan.com/ (Accessed on - 20/05/2010)
http://www.indiabulls.com/ (Accessed on - 22/05/2010)
http://www.reliancemoney.com/ (Accessed on - 22/05/2010)
http://www.indiainfoline.com/ (Accessed on - 23/05/2010)
http://karvy.com/v2/ (Accessed on - 23/05/2010)
http://www.traderji.com/ (Accessed on - 12/06/2010)
http://www.investorguide.com/ (Accessed on - 14/06/2010)
http://www.managementparadise.com/home.php (Accessed on - 17/06/2010)
http://www.worldscibooks.com/etextbook/5855/5855_chap1.pdf (Accessed on - 19/06/2010)
Newspapers -
Economics Times
Times of India
Financial Express
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